Reverse mortgages provide a win-win scenario for senior home owners

Releasing the equity stored up in your home in order to help your children, fund a more comfortable lifestyle or do a lot more traveling is nothing new. Senior homeowners have been doing just that for the last thirty years, releasing equity stored up in the increased value of their homes in order to help their children and grandchildren, built a larger home extension to house a Jacuzzi and, in general, enjoy their retirement years.

Figures released by the federal government indicate that the Home Equity Conversion Mortgage, which is insured by the federal government, jumped from 43,081 at the close of the financial year for 2005 to 76,276 at the end of the financial year for 2006, to make it the nation?s most popular reverse mortgage.

How a reverse mortgage works
Reverse mortgages are simplicity itself. The money is raised against the equity value of the house and as it gets spent and interest accrues the lender gets a greater piece of the house.

The trend has been so popular that a company called Circle Lending which specializes in family and small business loans has introduced a mortgage called Family Advantage which allows the children or close family friends to help a senior home owner to release equity in their home and still keep the house in the family.

Hugely popular with children who are already financing their parents on an informal basis, it allows a clearly documented mortgage and payments to be set up which gives everyone involved a financial boost. Senior home owners rest assured about extra money they receive and their children have a clearly documented paper trail showing the value of their investment.

The Home Equity Conversion Mortgage (HECM) program enables older homeowners to withdraw some of the equity in their home in the form of monthly payments for life or a fixed term, or in a lump sum, or through a line of credit. When the house is sold, or the last remaining borrower passes away the loan amount plus the accrued interest is repaid. The borrower can?t owe more than the value of the home. The HECM program has insured more than 240,000 reverse mortgages since 1990.

Tax-free payments
Circle Lending?s Family Advantage mortgage works in exactly the same way as conventional reverse mortgage except it allows a family member, or close family friend, to write a check every month ? or make a lump-sum payment ? to the parent or homeowner. In return, the person writing the check earns an equity interest in the home (as any lender would), plus interest, when the homeowner moves out. It?s basically a home equity loan funded by a family member, or friend, secured by real estate. The beauty of it is that because of its set up payments are received tax-free.

Circle Lending figures also indicate that, provided you have the kind of close family friends or children who can supply the money required to release equity in your home, it can also be a lot more cost-effective in terms of interest charged as the lending party, usually, does not look to maximize the investment, thus leading to average interest rates agreed at about six per cent.

?The cost to set up the Family Advantage loan averages $2,499 (includes documentation, lien recording, ongoing service, upfront consultation, and distribution of the repayment) plus $9 for each payment made, typically in the form of a monthly check. However, lump-sum payments can be substituted at any time, allowing the lender-child to earmark expected bonuses to the program or other funds that could be coming from stock sales, home sales, or other potential big-ticket windfalls.

The upside of the concept is that there is no age restriction (unlike with the HECM program where a minimum age of 62 is in effect), the property secured could be a principal residence, second home or investment property, and the upfront closing costs are less than the standard reverse mortgage. In addition, borrower and lender are free to negotiate a reasonable interest rate that reflects a genuine business deal and is backed by legal documentation.